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					GIRO XXX
2003 Convention
US D&O and PI
14-17 October 2003
City Hall, Cardiff

Doug Collins
Tillinghast – Towers Perrin
71 High Holborn
London WC1V 6TH
0207 170 2162
GIRO XXX
2003 Convention
US D&O, E&O and Med-Mal Liability
Douglas Collins
14-17 October 2003
City Hall, Cardiff
The D&O Insurance Market




■ Directors & Officers Liability
  A. Personal coverage
  B. Corporate reimbusement coverage
  C. Entity coverage
■ Employment practices liability
■ Fiduciary liability
Public insureds represent the largest share of the
market
                           Estimated 2002 Distribution of Premium by Segment



            By Ownership Type
                                                                  By Coverage Type

                 Not for
                  Profit                                        Fiduciary
                  10%                                             12%

   For Profit-
    Private
     20%                    For                                 EPL         D&O
                           Profit -                             28%         60%
                           Public
                            70%
2002 D&O Liability Survey



■ Survey of claim and purchasing patterns
■ Reflects market in second half of 2002
■ 2187 US participants
   ■ 44% - 500 or more shareholders
   ■ 42% - under 500 shareholders
   ■ 14% - not for profit
■ Annual update of survey that began over 20
  years ago
Claimant distribution varies significantly by
ownership type
           Public                                           Private                        Not for Profit
        70% of market                                    20% of market                    10% of market



                                                                                                       4%
                                                                                                            7%
                                                                     16%
         26%
                                                                               12%
                          52%                         51%

      10%                                                                                        89%
                                                                         21%
            12%



■ Large average severity shareholder suits dominate the                              Shareholders
  claims against public companies                                                    Competitors/Contractors/Other
■ Employee suits dominate claims against private and not-for-                        Customers/Clients
  profit companies
                                                                                     Employees
■ Severity of loss is typically a more significant driver of
  profitability for public exposures while frequency of loss is
  more of an issue for the profitability of private exposures
Source: 2002 Tillinghast D&O Survey (distribution of number of claims)
                         Average Claim Severity – For-Profit Risks

                         18

                         16

                         14
Millions of US Dollars




                         12

                         10

                          8

                          6

                          4

                          2

                          0
                          1982     1984     1986    1988     1990     1992    1994     1996     1998    2000    2002
                                                                   Survey Year

                                                        Def ense      Indemnit y     "Tot al"



                                 Source: 2002 Tillinghast D&O Survey. Severity of claims closed with payment.
                   Average Indemnity Severity by Claimant Type
                         30

                         27

                         24
Millions of US Dollars




                         21

                         18

                         15

                         12

                          9

                          6

                          3

                          0
                          1990       1992          1994           1996           1998           2000            2002
                                                              Survey Year

                                     Shareholder s        Employees       C ompet it ors     C ust omer s


                                 Source: 2002 Tillinghast D&O Survey. Severity of claims closed with payment.
D&O Premium Index – US, For-Profit Only
1000

 900

 800

 700

 600

 500

 400

 300

 200

 100

   0
   1974   1978   1982      1986         1990        1 994   1 998   2002

                           Median       Average

                  Source: 2002 Tillinghast D&O Survey.
Full D&O Limits Capacity ($ Millions)
1600




1200




 800




 400




   0
       4

            5

                    6

                         7

                                 8

                                      9

                                              0

                                                   1

                                                           2

                                                                3

                                                                        4

                                                                             5

                                                                                     6

                                                                                          7

                                                                                                  8

                                                                                                       9

                                                                                                               0

                                                                                                                    1

                                                                                                                            2
  98

           98

                98

                        98

                             98

                                     98

                                          99

                                                  99

                                                       99

                                                               99

                                                                    99

                                                                            99

                                                                                 99

                                                                                         99

                                                                                              99

                                                                                                      99

                                                                                                           00

                                                                                                                   00

                                                                                                                        00
  1

       1

                1

                     1

                             1

                                  1

                                          1

                                               1

                                                       1

                                                            1

                                                                    1

                                                                         1

                                                                                 1

                                                                                      1

                                                                                              1

                                                                                                   1

                                                                                                           2

                                                                                                                2

                                                                                                                        2
                             Source: 2002 Tillinghast D&O Survey.
Typical Limits and Retentions

 Type / Size             Limits                       Retentions
    NFP,
                    $1m to $10m                  $5k to $250k
 FP< 500sh
 FP > 500sh
  <$1B mkt        $10m to $50m                  $250k to $1m
     cap
FP > $1B mkt
                     Over $50m                   $1m to $5m+
     cap
               Source: 2002 Tillinghast D&O Survey.
D&O Market Premiums have doubled since 2000
                Estimated Direct Written Premiums
                                                                                       Growth Drivers
                                                                                       Growth Drivers
$ Billions
   10                                                                      •• Rapidly increasing
                                                                               Rapidly increasing
                                                                              rates
                                                                               rates
                                                                           •• Coverage terms and
                                                                               Coverage terms and
    5                                                                         availability, which
                                                                               availability, which
                                                                              were generally
                                                                               were generally
                                                                              broadening during
                                                                               broadening during
                                                                              the 1990’s,
                                                                               the 1990’s,
                                                                              contracted in 2002
                                                                               contracted in 2002
         1998      1999      2000      2001      2002      2003



        Source: A.M. Best; industry press, Tillinghast estimates. Note: These are midpoints of a range
        of estimates, e.g., 2000 base range is $4 billion to $6 billion. As D&O financial results are combined with other
        liability coverages in the Annual Statement, precise figures are not available.
     After several years of deteriorating results, the D&O
     market appears to be improving due to significant
     rate increases
                 Estimated Industry Profitability, 1996 – 2003
                                  (by accident/claims-made year)                            Key Trends
                                                                                             Key Trends
      Combined
         Ratio                                                                       •• Increasing claim
             140%                                                                        Increasing claim
                                                                                        frequency and
                                                                                         frequency and
             120%
                                                                                        severity changes
                                                                                         severity changes
Breakeven -->105%
              100%                                                                      will partially offset
                                                                                         will partially offset
               80%                                                                      strengthening
                                                                                         strengthening
               60%
                                                                                     •• Breakeven based on
                                                                                         Breakeven based on
                                                                                        opportunity cost
                                                                                         opportunity cost
               40%
                                                                                        approach
                                                                                         approach
               20%

                0%
                       1996 1997 1998 1999            2000 2001 2002 2003




        Loss & LAE Ratio           Combined Ratio (25% underwriting expense ratio)
     Source: Tillinghast estimates of loss ratios. A.M. Best for expense ratios.
Drivers of D&O Performance

■ Legislation, SEC regulations and court rulings
    ■ Impact of Private Securities Litigation Reform Act of 1995
     (“PSLRA”)
   ■ Sarbanes-Oxley, SEC certification requirement (2002)
■ Changes in loss costs
    ■ Frequency of class actions
    ■ Timing and severity of securities claims
    ■ EPL trends
■ Insured type or behaviour
   ■ M&A or IPO activity
   ■ Rating downgrades
   ■ Restatement of financial results
■ Pricing trends
■ Economic conditions
   ■ Bankruptcies, layoffs, stock market decline
The E&O Liability Market


                                                        Estimated
                                                     2001 DWP (000)
"Traditional" Specialty Areas

   Lawyers Professional Liability                        $1,000,000
   Accountants Professional Liability                       400,000
   Architects & Engineers Professional Liability            400,000
   Insurance Agents/Brokers Professional Liability          150,000

     Subtotal "Traditional" Specialty Areas              $1,950,000

Other Miscellaneous Professional Liability                $800,000
The Lawyers E&O market totals approximately $1.0
billion, and is serviced by 3 general types of insurers
                                          L a w y e rs E & O
                        D is tr ib u tio n o f E s tim a te d 2 0 0 1 D W P
                                                                 N A B R IC O
                                                                    13%

                                                                               O ther
                                                                           " S p e c ia lt y "
                                                                              C a rrie rs
                                                                                23%
                     " T ra d it io n a l"
                         C a rrie rs
                           64%




Source: A.M. Best, Marketstance, IMR, industry press, Tillinghast estimates.
A large number of “traditional” carriers write
Lawyers E&O…

       A d m ir a l                          D e e r f ie ld                     A m e r ic a n E q u it y
       C a r o lin a C a s u a lt y          E v a n s to n                      N o r t h la n d

       A I G / L e x in g t o n              H a rtfo rd /N u tm e g             C o lo n y
       A I G / N a t io n a l U n io n       H a r t f o r d / P a c if ic       P r e f e r r e d N a t io n a l

       C h ic a g o                          L ib e r t y M u t u a l            S t. P a u l
       In te rs ta te
                                             O ld R e p u b lic                  S ta r
       CNA
                                             P h ila d e lp h ia                 T IG
       C h u b b / E x e c u t iv e R is k
                                             R e d la n d                        Tudor
       C la r e n d o n
                                             R o y a l/ D P I C                  U n it e d N a t io n a l
       G r e a t A m e r ic a n
                                             SAFECO                              W e s tp o rt
       T r a v e le r s / G u lf
                                             S c o t t s d a le                  Z u r ic h
       Kem per



Source: Crittenden’s Specialty Coverages Insider and conversations with Tillinghast clients.
In addition, the following are significant Lawyers
E&O “speciality” insurers

                   American National Lawyers Insurance Reciprocal RRG
                   Association of Trial Lawyers Assurance RRG
                   Attorneys Insurance Mutual of Alabama
                   Attorneys Insurance Mutual RRG
                   Attorneys Liability Assurance Society RRG
                   Attorneys Liability Protection Society RRG
                   Bar Plan Mutual Insurance Company
                   Florida Lawyers Mutual Insurance Company
                   Illinois State Bar Association Mutual Insurance Company
                   Lawyers Mutual Insurance Company
                   Lawyers Mutual Insurance Company of Kentucky
                   Lawyers Mutual Insurance Company of North Carolina
                   Legal Mutual Liability Insurance Society of Maryland
                   Michigan Lawyers Mutual Insurance Company
                   Minnesota Lawyers Mutual Insurance Company
                   Ohio Bar Liability Insurance Company
                   Oklahoma Attorneys Mutual Insurance Company
                   Oregon State Bar Professional Liability Fund
                   Texas Lawyers Insurance Exchange
                   Wisconsin Lawyers Mutual Insurance Company


Source: NABRICO, AMBest’s, Crittenden’s Specialty Coverages Insider
       Small firms comprise the majority of the Lawyers
       E&O market
                            Lawyers E&O
            Distribution of Written Premium by Firm Size


                                            Small Accounts   (1-19
              19%                           employees)

                                            Medium Accounts (20-
                                            99 employees)
                             56%
            25%
                                            Large/Jumbo Accounts
                                            (More than 100
                                            employees)



                                                                              Law ye rs E&O
                                                                     Distribution of Policies Written
                                                                               by Firm Size

                                                                                1%

                                                                               4%




Source: IMR Data
                                                                                     95%
Recent loss ratios for Lawyers E&O have been
similar for NABRICO and traditional carriers

                 Comparison of Direct Loss & LAE Ratios (Sch. P)
                      E&O (Other Liability - Claims Made)

                1
               0.8
  Loss Ratio




               0.6                                                                          NABRICO Carriers
               0.4                                                                          Traditional Carriers
               0.2
                0
                     1992
                            1993
                                   1994
                                           1995
                                                  1996
                                                         1997
                                                                1998
                                                                       1999
                                                                              2000
                                                                                     2001
                                          Report Year
Drivers of E&O performance


■ Overall economic outlook
     ■ Claim activity generally increases in certain practice areas
       as the economy slows
     ■ Lower investment returns increase pressure for rate
       adequacy
■ Insured demographics
     ■ Practice areas/location/firm size/internal controls
■ Evolving case law/jury attitudes/legal trends
■ Specific market conditions
     ■ Coverage changes
     ■ Pricing trends

Source: Crittenden’s Specialty Coverages Insider, industry press.
       Medical malpractice is the largest professional
       liability line, accounting for $6.3 billion in DWP in 2000
                       Total Commercial Liability Premiums, Excluding Auto Liability

                                                              Products Liability
                                                   E&O        $1.9 Billion
                                           $2.75 Billion

                                    D&O**
                                $5.0 Billion


                                                                         Other Liability*
                               Medical                                   $25.7 Billion
                            Malpractice
                            $6.3 Billion
                                                    CMP Liability
                                                    $9.5 Billion




                                                      2000 DWP: $53 Billion

 *Consists predominantly of premises and completed operations coverages; also includes umbrella, excess and some non-medical
  malpractice professional liability written on an occurrence basis.
**Includes D&O, fiduciary and employment practices liability coverages.
        Source: A.M. Best; Tillinghast estimates.
                 In the Continuing Battle Over Medical
            Malpractice Costs, Whom Do You Feel Sorry for?




A. The poor, downtrodden    B. The lowly,          C. The small, struggling
   doctors                     underpaid lawyers      insurance industry
Note: You can only vote for one.
       Financial Results
       Combined ratios and operating ratios for the line
       have deteriorated steadily since 1994
                                   Industry Medical Malpractice Ratios, CY Basis
180%


160%


140%


120%

                                                                                                                                    N/A
100%


80%


60%


40%


20%


 0%
       1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

                                                            Combined            Operating




         Source: A.M. Best.
Financial Results
Reserve redundancies are masking the true deterioration of
results as carriers steadily draw down reserves set aside for
business written in the early 1990s

•         Reserves appear to have turned deficient sometime in the past two to three years
                    Ultimate Projected Loss at Different Valuation Points
                                Coverage Years 1991 – 2000
130%

120%

110%                                                                                                           Valuation Date
                                                                                                               Valuation Date
100%
                                                                                                                    1991
    90%
                                                                                                                    1992
    80%
                                                                                                                    1993
    70%

    60%
                                                                                                                    1994
    50%
                                                                                                                    1995
    40%
                                                                                                                    1996
    30%                                                                                                             1997
    20%                                                                                                             1998
    10%                                                                                                             1999
    0%                                                                                                              2000
            1991   1992     1993     1994     1995     1996     1997     1998     1999     2000

                                                     Coverage Year

     Source: A.M. Best’s Aggregates & Averages, Net Loss and DCC Schedule P Part 2 — Occurrence and Claims Made.
      The importance and size of alternative markets has
      fluctuated over time with changes in market
      conditions
                Medical Malpractice Premiums
                  and Premium Equivalents
$ Billions
        $14                                                                                       Commentary
                       $12.0
        $12                                        $11.3                        ■ Total medical malpractice premiums
                                                                                    and premium equivalents contracted
        $10
                                                                                    between 1997 and 1999 with rate
                         $5.6                       $4.6
                                                                                    reductions in the traditional markets
         $8
                                                                                    causing movement out of ART
         $6                                                                         market
                                                                                ■ As market conditions have hardened,
         $4                                                                         premiums are shifting back to the
                         $6.4                       $6.7
                                                                                    alternative markets
         $2
                                                                                    ■ The number of captives grew
         $0                                                                             2.4% in 2000 and 5.9% in 2001
                         1997                      1999

                 Traditional insurance premiums (DWP)
                 Alternative market* premium equivalents

*Includes off-shore premiums, premiums written by individual state JUAs and amounts paid to fund alternative risk management programs,
 such as trusts and risk retention groups.
 Source: For alternative market premium equivalents: Conning, “Medical Malpractice Insurance, A Prescription for Chaos,” 2001; For
 traditional insurance premiums (DWP): A.M. Best’s Aggregates & Averages, Schedule P Part I.
      A substantial portion of the alternative market is
      managed through captives domiciled in the Cayman
      Islands
             Growth in Cayman Captives                                  Health Care Captives in the Cayman Islands
                                                                                     by Type — 2000
600

500
                                                                    Type of Captive   Number   Premium Volume      Assets
400
                                                                    Hospital System    126       $680,354,244   $3,900,568,348
300
                                                                    Physician Group     34        $26,339,037    $169,649,263
200
                                                                    Long-term Care      20        $41,348,283     $63,382,269
100
                                                                    Total              180       $748,041,564   $4,133,599,880
  0
      1994 1995 1996 1997 1998 1999 2000 2001

                   Health Care          Other




Source: Cayman Islands Monetary Authority; Tillinghast estimates.
     The physicians market accounts for the largest share
     of traditional premiums; health systems typically
     utilize alternative mechanisms to manage their
     liability exposure
               Medical Malpractice Estimated Premium by Type of Customer, 1999
                                                                  MCOs
                                     Nursing Homes                $50 M
                                             $421M                <1%
                        Allied Health Care*
                                     $541M        7%
                                              9%

                                                                                     Physicians
                                                                            52%      (Office-based)
                                                       32%                           $3.1B
                                Hospitals
                                   $1.9B




          In addition to traditional premiums of $1.9 billion, hospitals paid between $4
           In addition to traditional premiums of $1.9 billion, hospitals paid between $4
          billion and $5 billion to fund alternative risk programs in 1999
           billion and $5 billion to fund alternative risk programs in 1999

*Includes all non-M.D. practicioners, with dental being the largest portion.
 Source: Conning, “Medical Malpractice Insurance, A Prescription for Chaos,” 2001.
The top 10 writers account for roughly 46% of total
medical malpractice premiums
                                                                       2000 Direct Written Premium*

                                 Group                                  $Millions         $ Total

                      1          St Paul Companies                         $575            9.1%
                      2          MLMIC Group                               $500            7.9%
                      3          GE Capital Insurance Group                $321            5.0%
                      4          Health Care Indemnity Inc                 $243            3.9%
                      5          CNA Insurance Companies                   $232            3.7%
                      6          Zurich/Farmers Group                      $212            3.7%
                      7          NORCAL Group                              $210            3.4%
                      8          MIIX Group                                $205            3.3%
                      9          Doctors Company Ins Group                 $205            3.3%
                      10         PHICO Group                               $182            2.9%


                      Top 10                                             $2,911             46%
                      Top 20                                             $4,323             69%
                      Top 30                                             $5,154             82%



*Calendar year data based on a group (vs. individual company) basis.
 Source: A.M. Best’s Aggregates & Averages.
          Competitive Landscape
          Physician-owned carriers account for half of
          traditional medical malpractice premiums
                                Medical Malpractice Premiums, By Type of Insurer

                                   Health system-
                                   owned Insurer:
                                             15%

                                                                                                    Traditional
                                                                                                    Carrier:
                                                                                                    34%




                         Physician-owned
                      Insurer (expanded):
                                                                                             Physician-owned
                                     42%
                                                                                             Insurer (limited):
                                                                                             9%
                                                                2000 DWP
                                                                $6.3 billion


Sources: Tillinghast analysis of A.M. Best data, based on classification of individual company results reflecting definitions on facing page.
          Issues and Opportunities
          Rising overall health care costs
                         YOY Percentage Changes, CPI vs. Medical CPI: 1980 – 2001
    16

                             CPI             Medical CPI
    14

    12

    10

      8

      6

      4

      2

      0
           1980       1982         1984   1986   1988      1990   1992   1994   1996   1998   2000



Source: Bureau of Labor Statistics.
      Financial Results
      Changes in the judicial environment and the health
      care system in general have led to a significant rise
      in malpractice awards and settlements
                          U.S. Median Medical Liability Awards and Settlements

           ($000)
             1,000




               800

                                                                                  Settlements

               600                                                                Awards




               400




               200
                        1993     1994   1995   1996   1997   1998   1999   2000

Source: Jury Verdict Research.
      Sample large rewards: 1997 versus 2000 - 2001

                              1997
                               1997                                                       2000 ––2001
                                                                                           2000 2001
 June, Queens County, NY                      $27,570,327   January 2001, Dallas County, TX             $269,000,000

 March, Boone County, KY                      $23,530,746   May 2001, Bronx County, NY                  $108,000,000

 November, Queens County, NY                  $19,275,466   January 2001, Philadelphia County, PA       $100,000,000

 September, Dade County, FL                   $18,924,000   May 2001, Nassau County, NY                  $75,000,000

 May, LA County, CA                           $15,700,000   March 2000, Los Angeles County, CA           $60,686,150

 April, Oakland County, MI                    $15,317,000   January 2001, Philadelphia County, PA        $49,594,684

 December, Philadelphia County, PA            $15,000,000   August 2000, Kings County, NY                $41,444,531

 June, Cuyahoga County, OH                    $14,460,000   June 2000, TX                                $32,676,410

 May, US District, HI                         $12,381,670   September 2000, Escambia County, FL          $31,100,000

 February, Kings County, NY                   $11,500,000   December 2000, New Haven, CT                 $30,000,000

 April, Orange County, CA                     $10,952,696   July 2000, Cuyahoga County, OH               $23,500,000

 October, Beaumont County, TX                 $10,900,000   September 2000, Philadelphia County, PA      $22,400,000




Source: Jury Verdict Research and West Law.
Financial Results
Factors contributing to the rising trend in medical
malpractice liability awards and settlements
■ Rise in public distrust of the medical profession and publicity about the
  number of medical errors
     ■ Public believes standards are declining, though actual malpractice is relatively
          rare
■ Growth in patient advocacy and the popularity of patients rights bills
   ■ Overall, the public is very strongly in favor of specific consumer protections
   ■ According to a Kaiser survey*, 70% of those consumers surveyed think patients
     should be able to sue a health plan for malpractice
■ Changes in the judicial environment
   ■ Easier to litigate and find counsel
   ■ Well funded and savvy plaintiff’s bar
■ Advent of managed care
   ■ Focus shifted from committed medical acts to omitted medical acts (i.e., refusal
     to treat and failure to diagnose)
             ■ Failure to diagnose breast cancer is now a leading cause of malpractice claims**
     ■ Loss of “intimacy” between doctor and patient
         ■ Primary care physicians pushed to see more patients
     ■ Expectations changed

  *Source: Kaiser Family Foundation Public Opinion Update (Document No. 1500) 2001.
 **Source: Physicians Insurers Association of America (PIAA) claims report.
     2001 results deteriorated significantly, as the
     industry took the opportunity to strengthen
     reserves
                                     Direct Combined Ratios — Medical Malpractice
                                              Coverage Years 1996 – 2004
                                                                                                                     Reported results
                   150%               143% 145% 142%                        143%
                             138%                                                    137%                            Forecasted results
                                                                  127%
                                                                                              115%
                                                                                                        107%       Breakeven
                   100%                                                                                            113%




                    50%




                      0%
                              1996     1997     1998      1999     2000    2001e     2002f    2003f     2004f




Source: Historical results: Annual statement, Exhibit of Premium and Loss (statutory page 14 data).
        Projected results: Tillinghast analysis of industry press reports, A.M. Best data and market experience.
Key success factors

■ Affinity
■ Home field advantage
   ■   Knowledge of medical providers
   ■   Knowledge of venues/rules
   ■   Access to defense counsel of choice
   ■   Politically active
   ■   Access to regulators
■ Access to brokers that understand the business
■ Proactive risk management culture in health system
   ■ Buy-in by senior management
   ■ Buy-in by medical staff
■ Aggressive claims handling
   ■ Commitment to defend
   ■ Pool of experts
■ Get price right

				
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